Home Improvement Loan Guide

Whether you are looking to renovate, make additions, or just make changes to your home, home improvement loans can be an ideal way to finance the cost. Home improvement loans come in a variety of forms. Essentially, home improvement loans can be classified as one of two types, secured or unsecured. Within these classifications, there are also different types of home improvement loans. Finding the best option to meet your needs can be an overwhelming prospect. Below you'll find the most popular types of home improvement loans that should help in your quest.

Secured Home Improvement Loans

Like the name implies, a secured home improvement loan is backed by collateral. Secured home improvement loans are backed by the equity in your home. Secured home improvement loans present a lower risk to banks and lending institutions because in the event of default, the home can be seized and sold to recoup any money lent. Because secured home improvement loans present a lower risk to lenders, they are often offered to homeowners for lower interest rates than unsecured alternatives.

The idea of using the accumulated equity in your home to make improvements, additions, or renovations is often a good idea for homeowners. By using the equity within your home investment as the basis for home improvement loans, you can often enhance the value of your home and increase your return on investment when it comes time to sell.

There are three primary types of secured home improvement loans, home equity loans, home equity lines of credit, and cash-out refinancing.

Home Equity Loans

A home equity loan is one of the most popular types of home improvement loans. A home equity loan is a type of second mortgage. With this type of home improvement loan, the homeowner uses the equity in the home as collateral to secure a one-time home improvement loan that can be used in any way the homeowner decides.

A home equity loan functions essentially like a traditional mortgage. The loan is given one time and the interest rate and repayment terms are fixed and established at the outset. A home equity loan is often the best option for homeowners who are looking to make one time, major renovations and need access to a large inflow of cash once.

Home Equity Lines of Credit

Another popular type of secured home improvement loans is a home equity line of credit. Like a home equity loan, a home equity line of credit uses the equity accumulated in your home as collateral to secure the loan. In this way, homeowners can often take advantage of the lower interest rates associated with a home equity loan when securing a home equity line of credit.

Unlike a home equity loan, a home equity line of credit is not a one-time cash loan. Instead, a home equity line of credit establishes available credit, similar to a credit card. Cash can be drawn on this line of credit on an as-needed basis at the owner's convenience. The homeowner can borrow against the credit limit, repay the amount borrowed, and borrow again during the loan period. All of the features of a home equity line of credit make it one of the best options for homeowners looking for a home improvement loan that can support renovations and improvements over time. Unlike a home equity loan that distributes a large sum of money one time, a home equity line of credit allows homeowners to borrow and repay smaller amounts of money on an as-needed basis and minimize the interest owed over time.

Cash-Out Refinancing

The third type of secured home improvement loans is a cash-out refinancing. With a cash-out refinancing, you refinance your original mortgage for a higher amount that you owe and receive the difference in the form of cash. A cash-out refinancing allows homeowners to adjust their primary mortgage and take advantage of any accumulated equity rather than take a second mortgage through a home equity loan or home equity line of credit.

A cash-out refinancing most resembles a home equity loan in that it results in a one-time cash loan. When deciding between a home equity loan and a cash-out refinancing, one of the most important things to consider is interest rates. If the interest rate that can be achieved through a cash-out refinancing is lower than the interest rate on the original mortgage, it makes sense to choose this option. A cash-out refinancing not only sets the terms for repayment on the home improvement loan, but also resets the terms and interest rate for the entire mortgage. For this reason, unless the interest rate is lower than the original, it doesn't make sense to choose a cash-out refinancing option.

Unsecured Home Improvement Loans

Home improvement loans generally refer to one of the many types of secured and unsecured loans. However, some banks and lending institutions offer an unsecured personal home improvement loans. Where the secured home improvement loans discussed can be used for financial needs other than home improvements, specific unsecured home improvement loans can only be used for home improvements.

Unsecured home improvement loans are often a far more expensive way to finance home improvements than are secured alternatives. This is because unsecured home improvement loans are a higher risk to lending institutions than secured options. The higher interest rates associated with unsecured home improvement loans only makes sense if a secured alternative is not available.

An unsecured home improvement loan is often the only option for individuals who have no accrued enough equity in their homes to obtain a secured home improvement loan.

In conclusion, there are many types of secured and unsecured home improvement loans available on the market. The exact type of loan that you works best for your depends on your unique situation, the amount of equity that you have in your home, and how you plan on making improvements.